BASIC PRINCIPLES

ACC 03 A.Y. 2023-2024

Accounting and Bookkeeping
Accounting is the process of identifying, recording and
communicating economic information to permit informed
judgment and decision by users of the information
 The Accounting Cycle
Reversing Entries *identifying and measuring
Analysis of transactions
*recording to the GJ

Post-Closing Trial Balance Journalizing

*posting to the GL
Post-Closing Entries Posting

*communicating
Financial Statements Unadjusted Trial Balance

Adjusted Trial Balance Adjusting Entries

“Bookkeeping”
It is the recording phase of accounting.

1. Single-entry bookkeeping – only the value received or will

be received, or value given up will be recorded

2. Double-entry bookkeeping – the two-fold effect of a

transaction is recorded
Bookkeeping Records
All persons required to pay income and business taxes shall
keep a journal and a ledger (or its equivalent, e.g., subsidiary
ledger) and simplified books of accounts.

1. General Journal
2. General Ledger
3. Cash Receipts Book These books must be kept for at
least 10 years!
4. Cash Disbursements Book
5. Subsidiary Journals
6. Subsidiary Ledgers
Foundations
 Historical Cost Fair Value

The value of a thing at the The value of a thing where a

time it was originally purchaser and seller would
purchased/spent/transacted reasonably meet
Underlying Assumptions
Also known as postulates, these refer to the basic notions or
fundamental premises on which the accounting process is based.

1. Going Concern
2. Accrual Basis
3. Accounting Entity
4. Time Period
5. Monetary Unit
1 - Going Concern
In the absence of evidence to the contrary, the accounting entity
is viewed as continuing in operation indefinitely.
• This means that financial statements are normally prepared on
a going concern basis unless management intends to:
1. Liquidate
2. Cease operations
3. No realistic alternative but to do so

• Management shall make an assessment of an entity’s ability to

continue as a going concern and shall make the proper
disclosures.
2 - Accrual Basis
Effects of transactions and other events are recognized and
recorded when they occur, not when cash or its equivalent is
actually received or paid.
• Income is recognized when earned, regardless of when
received
• Expense is recognized when incurred, regardless of when paid

Accounts receivable and payable

This justifies the recognition
Prepaid and accrued expenses
of the following accounts:
Accrued and deferred income
3 - Accounting Entity
Also known as separate juridical entity, and also known as the
economic entity assumption, the entity is separate from the
owners, managers and employees who constitute the entity.

Accordingly, the transactions of the entity and personal

transactions of owners should be separate and not merged.
4 - Time Period
Also known as the periodicity assumption, the indefinite life of an
entity is subdivided into time periods or accounting periods
which are usually of equal length for the purpose of preparing
financial reports.

1. Fiscal period
a. Calendar year
b. Business year

2. Interim period
5 – Monetary Unit
Transactions are assumed to be measured in stable monetary
units.
• Correlate with definition of accounting: “measuring”
“New Conceptual Framework”
It is a summary of consistent terms and concepts that underlie
the preparation and presentation of financial statements for
external users. Its salient parts are:
1. Purpose and Objectives
2. Qualitative Characteristics of Useful Financial Information
3. Financial Statements and its Elements
4. Recognition and Derecognition
5. Measurement, Presentation and Disclosure
6. Concepts of Capital and Capital Maintenance
Hierarchy of Guidance
Accounting Standards

Other PFRS in
similar transactions

Conceptual Framework

Management may consider:

1. Pronouncements from other standard setting bodies
2. Other accounting literature
3. Industry practices
 General Purpose Financial Reporting
It is the process of communicating financial information to the
entity’s stakeholders based on their common needs.
Primary Users Secondary Users

Parties, who in general, cannot require As a residual definition, parties other than
entities to provide information directly to primary users, who are parties which may
them but must rely on general purpose find general purpose financial reports
financial reports. useful but are not directed to them.

1. Existing and potential investors These include:

2. Lenders 1. Employees
3. Other creditors 2. Customers and the public
*Assets = Liabilities + Equity
3. Government

primary users
Objective of GPFR
To provide financial information about the reporting entity that
is useful to existing and potential investors, lenders, and other
creditors (simply users) in making decisions relating to providing
resources to the entity.
• Entities must provide information that will meet the common
needs of the maximum number of primary users.

Note, however, that GPFR does not give the actual and true
value of the reporting entity, but only gives an estimate thereof.
Qualitative Characteristics
These refer to the qualities that make accounting information
useful to the users.
Fundamental Enhancing
1. Relevance 1. Comparability
a. Predictive value 2. Understandability
b. Confirmatory value 3. Verifiability
c. Materiality 4. Timeliness

2. Faithful representation
a. Completeness
b. Neutrality
c. Free from error
Fundamental Qualitative Characteristics
1 - Relevance
It is the capacity of the information to influence a decision – information
that does not affect an economic decision is irrelevant.

Predictive Confirmatory Materiality

Value Value
Fundamental Qualitative Characteristics
2 - Faithful Representation
Financial reports must faithfully represent the substance of the phenomena
that it purports to represent

Completeness Neutrality Free from Error

Principle of fairness = free On both description and

To facilitate understanding
from bias process used

*However, it does not mean

Adequate disclosures Notes to FS perfectly accurate in all respects.
What is important is that it be
described clearly and faithfully.
Other Factors
These are characteristics which used to form part of faithful representation
as a separate item but are now inherent or implicit in its concept.

Substance Over Form Prudence

When a transaction’s Care and caution must be
substance differs from its exercised when dealing with
legal form, faithful uncertainties, so that assets
representation requires the and income are not
depiction of its substance, overstated, while liabilities
not its form. and expenses are not
understated.
How to Apply Fundamental QCs
1. Identification – Identify the economic phenomenon or
information which is capable of being useful to users

2. Relevancy – Identify the specific information that would be

most relevant

3. Faithfulness – Identify whether the information is available

and whether it can provide a faithful representation of the
economic phenomenon
Enhancing Qualitative Characteristics
1 - Comparability
Refers to the ability to bring together for the purpose of noting points of
likeness and differences.

Intra-comparability Inter-comparability

Consistency
Enhancing Qualitative Characteristics
2 - Understandability
Financial information must be comprehensible or intelligible to be most
useful, considering that financial statements cannot realistically be
understandable to everyone.
3 - Verifiability
Different knowledgeable and independent observers could reach a
consensus that a particular depiction is a faithful representation

Direct verification Indirect verification

4 - Timeliness
Financial information must be available or communicated in time enough
for it to be useful and capable of influencing decisions
 Constraints on Financial Reporting
1. Cost – a pervasive constraint on the entity’s ability to
provide useful financial information
• Financial reporting requires costs. The benefit of giving out financial
information must be greater than the cost of obtaining the information.

2. Materiality

3. Prudence

4. Industry practices
Unauthorized reproduction and/or distribution is prohibited. Karma is a bitch.
Elements of Financial Statements
1. Assets – resources and rights controlled by the entity as a result of past
transactions or events and from which future economic benefits are
expected to flow to the entity

2. Liabilities – present obligations of the entity arising from past

transactions or events the settlement of which is expected to result in an
outflow from the entity of resources embodying economic benefits

3. Equity – residual interest in the assets of the entity after deducting all its
liabilities
 Elements of Financial Statements
4. Income – increase in economic benefit during the accounting period in
the form of inflow or increase in asset or decrease in liability that results
in increase in equity, other than contribution from equity participants

5. Expense – decrease in economic benefit during the accounting period

in the form of an outflow or decrease in asset or increase in liability that
results in decrease in equity, other than distribution to equity participants

Unauthorized reproduction and/or distribution is prohibited. Karma is a bitch.

BUSINESS ORGANIZATIONS
Forms of Business Organizations
1. Sole Proprietorship – owned and operated by one individual

2. Partnership – contract between two or more persons who

bind themselves to contribute money, property or industry to a
common fund, in pursuit of a business or profession, with the
intention to divide the profit among themselves

3. Corporation – artificial being created by operation of law,

having the right of succession and the powers, attributes, and
properties expressly authorized by law or incident to its
existence
Forms of Business Organizations
4. One Person Corporation – corporation formed by a natural
person, trust or estate
• Like a sole proprietorship, it can be created by one individual.
However, it has a separate personality and the sole incorporator has
limited liability.
• Like a corporation, it has a separate personality for the purpose of
conducting business and has limited liability. However, it is comprised
of only one person.
 Sole Prop. Partnership Corporation
Minimum: 1
# of persons (to start) 1 2 or more
Maximum: 15
How created DTI Registration Mutual Agreement SEC Registration
Cost for creation Least costly Costly Costliest
Separate juridical
No Yes Yes
personality
Generally: Unlimited
Liability Unlimited Limited Liability
Exc: Limited Partners
Income Solo Shared Shared
Only one; either the May be taxed twice: as
Only one; borne by the
Tax on income partnership or partners to income and as to
proprietor
themselves dividends
Can be passed, with
Transferability Only upon death Can be passed anytime
consent of others
Ability to raise capital Difficult Relatively difficult Easiest
Schedular or Fixed
Tax amount Schedular Income Tax 25% Flat Rate
Preferential Rate
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